Year-end job gains key to Fed’s next move

Big gain could trigger another cut in bond buys; watch out for December freeze

WASHINGTON (MarketWatch) — The monthly U.S. jobs report is always a big deal, but the Federal Reserve has magnified its role by tying its interest-rate strategy to a sustained pickup in hiring.

The faster companies add workers and the unemployment rate falls, put simply, the faster the Fed will completely unwind a controversial bond-buying program meant to stimulate the economy.

If all goes according to plan, the U.S. is expected to show a net gain of around 190,000 jobs in December, a number that could spur top Fed officials to trim bond purchases for a second time when they meet in late January. The central bank took its first step last month to end the bond-buying program when it reduced purchases of Treasurys and mortgage-backed securities to $75 billion from $85 billion a month.

Yet a big gain in employment in December is no slam dunk. The report, released Friday, is expected to be fairly strong, but severe winter weather earlier in the month could have curbed hiring in industries such as construction and hospitality.

What’s more, the unemployment rate could actually rise from its current rate of 7% if more people enter the labor force because they think jobs are getting a bit easier to find. The Fed wants to see the jobless rate tumble toward 6% or less.

Even disappointing December jobs figures, however, would be unlikely to alter the Fed’s plan to end bond purchases by late 2014 — barring a wealth of other evidence suggesting that the economy is slowing again.

“I expect further reductions in the pace of purchases to be under consideration at upcoming meetings,” Richmond Federal Reserve President Jeffrey Lacker said Friday in a speech in Baltimore.

The new boss

On Monday, Lacker and his colleagues probably will learn who will be in charge of those Fed meetings. The U.S. Senate has scheduled a vote on the nomination of Janet Yellen to replace outgoing Chairmen Ben Bernanke and she’s expected to sail through.

Two days later, the Fed will release a recap of its Dec. 17-18 meeting at which top central bankers including Yellen voted to scale back bond purchases. The summary could yield hints on the path the Fed is likely to follow over the next year.

“It will be interesting to see the various options discussed, and whether the minutes hold any clues as to the rate at which tapering may proceed over the course of 2014 should the economy continue to improve as expected,” said Richard Moody, chief economist at Regions Financial Corp.

Before Friday’s jobs report, Wall Street will also digest data on trade, factory orders and the health of the “service” side of the economy — areas such as retail, health care and finance that employ the vast majority of Americans.

Companies that provide services posted strong growth in the second half of 2013 and there’s been little if any letup. The downside is that many of the people hired in those industries tend not to be particularly well paid.

The good news is that the manufacturing sector, a source of good-paying jobs, gained steam toward year end after a very slow start in 2013, according to a number of surveys of industry executives.

What’s critical now is that so-called hard data such as factory orders verify the growing optimism of manufacturers. Factory orders are forecast to climb 1.6% in November, a sizable gain that would support the idea that the rebound is real. The report is released Monday.

December jobs “freeze?”

Capping off the week is the U.S. employment report. Investors will get a clue to hiring trends a few days earlier when giant payroll processor ADP reveals how many private-sector jobs were created in December.

Economists polled by MarketWatch project ADP to show a 230,000 increase, which would mark the biggest spike in 13 months.

Don’t jump entirely on the bulls’ bandwagon, however, if ADP is a blockbuster. The ADP and Labor Department reports tend to track each other closely, though they often diverge sharply from month to month.

By and large, most economists expect another gain in official U.S. payrolls of around 200,000. Job gains shot up to a three-month average of 193,000 in November from 166,000 in August, fueling hopes that the labor market is turning the corner after years of sluggish hiring.

Yet at least one firm, Citi, cautions that a December freeze could be in store. Citi economists predict a small 125,000 increase in nonfarm jobs because of the onset of wintry weather.

Even if they are right, though, the firm said it would be just a blip.

“We don’t think a pullback says anything about the underlying trend in payroll gains, where the trend has been remarkably steady around 180,000 per month for three years and more likely to edge higher,” Citi economists wrote in a report.

Others are less sure. Lacker of the Richmond Fed pointed out that job growth over the last few years is only increasing half as fast as it did before the Great Recession struck. He said many businesses either cannot find qualified workers or are discouraged by a surge in regulations.

“Businesses also appear to be quite reticent to hire and invest,” he said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.